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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

September 18, 2017

The Rising Cost of Remittances to Mexico Bucks a Trend

From time to time, I like to look back at previous Risk Forum activities and see what payment topics we've covered and consider whether we should revisit any. In September 2012, the Risk Forum hosted the Symposium on 1073: Exploring the Final Remittance Transfer Rule and Path Forward. Seeing that almost five years have passed since that event, I decided I'd take another, deeper look to better understand some of the effects that Section 1073 of the Dodd-Frank Act has had on remittances since then. I wrote about some of my findings in a paper.

As a result of my deeper look, I found an industry that has been rife with change since the implementation of Section 1073 rules, from both a regulatory and technology perspective. Emerging companies have entered the landscape, new digital products have appeared, and several traditional financial institutions have exited the remittance industry. In the midst of this change, consumers' average cost to send remittances has declined.

Conversely, the cost to send remittances within the largest corridor, United States–Mexico, is rising. The rising cost is not attributable to the direct remittance fee paid to an agent or digital provider but rather to the exchange rate margin, which is the exchange rate markup applied to the consumer's remittance over the interbank exchange rate. As remittances become more digitalized and the role of in-person agents diminishes, I expect the exchange rate margin portion of the total cost of remittance to continue to grow.

Even though the average cost of sending remittances to Mexico is on the rise, I found that consumers have access to a number of low-cost options. The spread between the highest-cost remittance options and the lowest-cost options is significant.

With greater transparency than ever before in the remittance industry, consumers now have the ability to find and use low-cost remittance options across a wide variety of provider types and product options. To read more about the cost and availability of remittances from the United States to Mexico and beyond in a post-1073-rule world, you can find the paper here.

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September 17, 2012

Change Is the Only Constant: Section 1073 Set to Take Effect

If you are reading this post, then no doubt you are familiar with the passage of the Dodd-Frank Act, specifically Section 1073, which is the basis for the new rule pertaining to consumer-originated funds transfers from the United States to consumers or businesses in foreign countries. I recently attended a meeting where representatives from the remittance transfer industry discussed the responsibilities, complexities, and challenges of complying with the remittance transfer rule by the inaugural date of February 7, 2013. Not surprisingly, complying with the rule is a massive undertaking—when you consider that the remittance transfer business is, by definition, a business with a global reach.

One premise behind the rule was to create more transparency in remittance costs and thereby encourage competition in the market, to the ultimate benefit of the consumer. Today’s procedures for sending money abroad are basic. Locate one of more than a half-million domestic locations—in addition to many financial institutions, almost every gas station, drug store, and grocery store offer this service—complete a remittance form, hand money and form to a clerk, and wait a few minutes for confirmation. The funds are then made available to the receiver. A recent report published by the World Bank concluded that the United States currently maintains an average total cost to send a remittance below the global average (6.93 percent of the remittance amount versus 9.3 percent), thanks to the high volume and intense competition among the current large number of products and services available in the United States.

However, unknown to both parties at the time of origination is the exact dollar amount that the recipient will receive, because of hidden fees, taxes, and other costs not necessarily apparent. The rule will replace this "unknown" with a required hard copy receipt outlining, in any language used to market, advertise, or solicit business, all fees, commissions, taxes, the exact dollar amount netted to the receiver, and the time that the funds will be available for pickup. (There are other specifics, but no need to reiterate the entire law in this short blog!) A common pain point yet to be resolved in the compliance effort revolves around the ability of the sending entity to provide accurate receiving-end tax information. As an example, some countries have multiple and changing tax rates for different regions or a variable-fee structure on the receiving end based on the receiver’s status and relationship with the receiving entity. These tax and fee issues suitably demonstrate how achieving compliance will require cooperation from foreign entities in more than 213 country corridors, not under a remittance transfer provider’s control or subject to U.S. jurisdiction. Many in attendance suggested that a central database of tax information may be a way to address the conundrum. Whether provided by a third party in the industry or a government entity, a central database would provide consistent data and minimize research and upkeep costs for all transmitters.

In addition to cooperation, education for all players will be instrumental. Consumers should be made aware of their new right to cancel any transaction within 30 minutes of submitting and that they have contact information on their receipt in the event of any errors. At the same time, all remittance providers, including agents, need to be trained and educated to ensure compliance with this new rule.

With system changes required to produce the disclosures, will remittance providers reduce the number of channels used for remittances until they can modify their systems? With the number of contractual agreements required, will providers reduce the number of countries served or products offered? And given the cost, will remittance providers raise prices? And will U.S. consumers find alternative ways to send money? Only time will tell as the deadline for complying approaches.

The rule may eliminate some existing players from the game, as protection never comes without a price. At the same time, pioneering and innovative competitors might provide new channels and more products that will benefit consumers. Like anything that forces us to reinvent ourselves, change brings with it new threats and challenges, but the opportunities can be vast and rich. With a little imagination and a lot of hard work, the rewards can be enormous.

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